What’s up everyone
Last week real estate billionaire Ross Perot Jr, Corcoran Group founder Barbara Corcoran, Twitter owner Elon Musk and Big Short investor Dave Burt warned of an impending “real estate recession,” “bloodbath” and “meltdown,” citing various causes for a downturn.
While Corcoran is mostly concerned with the Commercial sector, Elon Musk tweeted that US home values are set to plummet. He offered his take on the housing market on Twitter — the social network he bought last year — that “commercial real estate is melting down fast. Home values next.”
Musk immediately got backlash from Glenn Kelman, Redfin’s CEO, as well as Selma Hepp, the chief economist at CoreLogic.
So today, we’ll look at what each of them are saying about the future of the housing market.
Let’s dive right in
First, let me say that Musk isn’t alone in his opinion. Ray Farris, the chief US economist at Credit Suisse, and Ian Shepherdson, the chief economist and founder of Pantheon Macroeconomics — who called the 2008 housing crisis — are projecting double-digit national home price declines in 2023.
And Dave Burt, the Big Short investor who also predicted the 2008 housing market collapse (see video on Dave Burt), believes that climate change will cause a housing market crash if lenders don’t start taking into account climate risk, like flooding. I did a video on this so if you want to see more of why Burt thinks that, check it out next.
But does Elon Musk really have the proper knowledge about the housing market to predict its future? I know it was reported that he recently sold off his own residential real estate and is sleeping on his friends couches https://www.businessinsider.com/elon-musk-doesnt-own-home-sleeps-in-spare-bedrooms-2022-4 but does that make him an expert? I’m pretty sure he didn’t sell all of his homes because he thought the values were about to plummet. Its more likely he sold his residences to show that he doesn’t live like a billionaire to prove he’s more fiscally and environmentally responsible.
“It would be very problematic if I was spending billions of dollars a year in personal consumption, but that is not the case,” Musk said, adding that he doesn’t own a yacht or really take vacations, though he famously does have a personal jet.
Is the jet electric? I know he wants to build an electric airplane, but I’m pretty sure his present jet emits fossil fuel. I found this on business insider-
Musk’s carbon footprint from his 171 private flights in 2022 was 132 times the size of the average US resident’s total annual footprint from all activities, the report found. His private plane burned about 221,358 gallons of jet fuel and emitted about 2,112 metric tons of carbon emissions last year, the report found.
But I digress. Let’s get back to his tweet on the housing market and the responses.
But before we do that, let’s look at what the others are saying about a possible real estate recession.
Barbara Corcoran believes the commercial real estate sector is in trouble.
“It’s great to say pennies on the dollar, but no one has the confidence to buy now,” Corcoran said Wednesday in an interview on Fox Business, referring to the commercial sector. “No one really believes it’s going to turn the corner. I don’t see that turning around. I think it’s going to be a bit of a bloodbath before it gets better.”
When asked about the residential housing market, Corcoran noted that she expects the residential real estate sector to rise again as soon as mortgage rates, which earlier this week hit a 2023 high of 6.91 percent, subside.
“Right now, what everybody’s afraid of is the high-interest rates,” Corcoran added, “But the minute those interest rates come down, all hell is going to break loose and prices are going to go through the roof,” Corocran said. “I would not put it by the housing market that home prices go up by 20 percent. We could have COVID all over again.”
And Ross Perot Jr, the son of former Independent presidential candidate Ross Perot and the chairman of the Perot Group, warned in an interview with Bloomberg TV on Tuesday that a “real estate recession” could be imminent if banks don’t start loaning again.
He, too, is talking about the commercial real estate sector.
“If the industry can’t get a construction loan, real estate will have a recession,” Perot said. “The key to commercial real estate today will be banking.”
Elon Musk, however, said that residential Home values will follow the commercial real estate meltdown.
After tweeting this, Glenn Kelman immediately responded by saying that residential real estate isn’t suffering from the same lack of demand as commercial real estate has since the onset of remote work.
“The loss in demand for commercial real estate is what’s driving demand for residential real estate,” Kelman wrote. “People who work from home need more space at home. Sales volume is down because inventory is down. Today, home prices increased for a second straight month.”
Data released this week via the S&P CoreLogic Case-Shiller Index shows that United States home prices rose 0.7 percent during March compared to a year before — the second straight month that prices increased leading many experts to suggest a period of annual price declines may be coming to an end.
In a second tweet, Kelman said that “inventory is at roughly two thirds the levels it was pre-pandemic, from 2016-2019, during a strong seller’s market.”
In other words, Kelman was arguing that residential real estate is still experiencing a seller’s market now, the implication being that a meltdown doesn’t appear imminent.
Needless to say, there were some responses to Kelman’s tweet that were pretty aggressive. One person said “Why do we have to trust you! You’re lying for your benefit” .
But Kelman isn’t alone.
Selma Hepp, the chief economist at CoreLogic, says that the nation’s lack of housing supply will keep home prices high and prevent a crash.
She believes the housing market is heading towards a recovery.
“It is my take that we are not seeing signs of a potential crash at all,” Hepp told Insider. “If anything, home prices are growing again and at a much faster pace than anticipated.”
The S&P CoreLogic Case-Shiller US National Home Price Index supports Hepp’s statement, showing a monthly gain of 1.3% in March, which is an acceleration from the 0.3% increase a month earlier.
CoreLogic found that homebuying activity in March was the hottest on the West Coast, and that San Diego and San Francisco — one of a few US cities that did suffer double-digit price drops — posted the strongest monthly price gains.
Hepp thinks the housing market is rebounding due to the imbalance of supply and demand.
She’s not wrong- at least where I am in the DC area. I’m seeing multiple offers and prices escalating way above the list price in today’s market for good houses. And by good, I mean the houses that show well and are priced right.
“The spring home buying season is characterized by stronger return of buyers than sellers, which created another competitive market environment, and one in which the very meager inventory of existing homes is putting buyers in a position of having to pay over the asking price,” Hepp said. This has driven spring price gains well beyond what is traditionally seen during this period, she added.
I know that my potential sellers are choosing to sit tight with their super low interest rate rather than sell and have to buy with a much higher rate. And I can’t say I blame them. Most of us refinanced in the last 3 years. I know I have a 2.875% interest rate on my house. Why would I sell it and then buy something with a 6+ rate. It just doesn’t make sense.
The sellers I do have either decided to rent, or are moving out of state, or simply don’t care about interest rates because they will be buying cash.
Less sellers equals less inventory which means the demand will be higher than the supply therefore resulting in multiple offers on good houses.
Hepp said that bidding wars could become only more common as the year progresses.
“We’ve seen an increase in biddings,” she said. “In our data, about 32% of homes sold over the asking price in April. That means we’ve probably seen the extent of home price declines.”
Business Insider gave an example of a home in Durham Connecticut, a small town of just over 7,000 people located two-hours from Boston and New York City, where more than 300 people lined up to tour a 1,168-square-foot home.
300 people! That’s insane. According to data from Redfin, during March, 33% of homes that were sold in the city went above the asking price.
Some other data from Redfin’s latest housing market update shows that home sale prices increased most in Milwaukee (9.3%), Cincinnati (6.4%), Miami (5.7%), Fort Lauderdale, FL (5.4%) and Newark, NJ (4.7%).
New listings of homes for sale fell 23.4% year over year, adding to a 10-month streak of double-digit declines.
This lack of inventory needs to change if we want to ever see a balanced market.
New listings declined in all metros Redfin analyzed. They fell most in Las Vegas (-42.3% YoY), Oakland (-39.8%), Seattle (-39.4%), San Diego (-37.1%) and Phoenix (-36.8%).
Active listings (the number of homes listed for sale at any point during the period) dropped 2.9% from a year earlier, the second decline in 12 months. Active listings also inched down (about -0.2%) from a month earlier; typically, they post month-over-month increases at this time of year.
But even with active listings being bought up, Pending home sales were down 17% year over year, the second-biggest decline since January. The biggest was a week earlier, when pending sales declined 17.1%.
Pending home sales fell in all metros Redfin analyzed. They declined most in Seattle (-31.8% YoY), San Diego (-31.4%), Portland, OR (-30.1%), Sacramento (-26.3%) and Milwaukee (-25.8%).
This only confirms that even with more active listings being bought up, the amount of transactions is still going down because there is just not enough homes to buy.
Homes that sold were on the market for a median of 29 days, the shortest span since September. That’s up from a record low of 18 days a year earlier.
And this is the median remember. Where I am, if a house is overpriced or shows poorly, it will sit until it gets reduced enough for a buyer to pull the trigger.
On average, 5.2% of homes for sale each week had a price drop, up from 3.9% a year earlier.
And 34.7% of homes sold above their final list price. That’s the highest share since September but is down from 54% a year earlier.
And the months of supply, a measure of the balance between supply and demand, calculated by the number of months it would take for the current inventory to sell at the current sales pace—was 2.7 months, up from 2.1 months a year earlier. Four to five months of supply is considered balanced, with a lower number indicating seller’s market conditions.
So 2.7 months (which is higher than where I am) is still a sellers market.
What are you guys seeing where you live? Are you seeing what I am- multiple offers and bidding wars? Or are you seeing more inventory and possibly foreclosures?